Tuesday, July 26, 2016

Bangladesh holds rate, inflation seen easing to 5.45%

    The central bank of Bangladesh will maintain its key policy rates, the repo and reverse repo rate, at a 6.75 percent and 4.75 percent, in the first half of the 2017 fiscal year, which began on July 1, but said it would adjust monetary growth and rates if necessary to keep inflation around 6 percent.
    Bangladesh Bank (BB) said consumer price inflation had been on a slowly declining trend for the last couple of years - the 12-month average rate fell to 5.92 percent in June 2016 from 7.28 percent in July 2014 - but a further decline due to lower fuel and commodity prices may not be strongly attained.
    BB, which cut its rates by 50 basis points in January, forecast inflation of 5.45 percent in December this year, down from 6.2 percent target for June 2016, with 6 percent seen as "a safe zone" as data and studies suggest that 6 percent inflation, along with one standard deviation, is a growth maximizing threshold.
    Consumer price inflation rose slightly to 5.53 percent in June from 5.45 percent in May and down from 6.07 percent in January this year.
    The recent decline in inflation is mainly due to falling food prices while non-food inflation has edged up due to a boost in consumption following the historically highest salary hike for the public sector, with BB expecting the private sector to follow suit, putting upward pressure on inflation.
    The economy of Bangladesh attained almost all key objectives in fiscal 2016, which ended June 30, with broad money (M2) growth below the target until May this year and likely to remain within the ceiling of 15.0 percent by the end of June.
    For fiscal 2017 the target for broad money is 15.5 percent based on Gross Domestic Product growth of 7.2 percent and consumer price inflation of 5.8 percent.
    Private sector credit grew robustly throughout FY16 and was at 16.4 percent in May, overshooting the targeted end-June ceiling of 14.8 percent. However, with the government's small net bank borrowing at the end of FY16, overall domestic credit growth remained below the targeted path and is likely to be within the 15.5 percent ceiling by end-June.
   Domestic credit is projected to grow by an annual rate of 16.4 percent in FY17, with credit to the private sector up by 16.5 percent and growth to the public sector of 15.9 percent.
    Bangladesh's government targets economic growth of 7.2 percent for fiscal 2017, up from the FY16 target of 7.0 percent, with BB forecasting growth of 7.1-7.3 percent, above the World Bank's 6.3 percent forecast for 2017 and the International Monetary Fund's forecast of 6.9 percent.
    Data indicate that Bangladesh's GDP will grow by 7.05 percent in FY16, up from 6.55 percent in FY2015.
    BB follows an foreign exchange rate policy of a managed float and has been buying taka to keep it from appreciating, keeping the exchange rate stable for almost three years since early 2013.
   The take was trading at 78.48 to the U.S. dollar today, little changed from 78.43 at the start of this year, with BB's foreign exchange reserves reaching "an adequately comfortable level" of US$30 billion in June - the equivalent of almost 8 months of imports - and expected reach a record high of $33 billion by the end of fiscal 2017.
    Under its new governor, Fazle Kabir who took over in March, BB is working on a transition path toward targeting market interest rates from the current monetary policy approach of mainly targeting the money stock, which is most useful for underdeveloped countries with limited external openness.




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